What is the difference between Dynamic and Surge Pricing

Introduction

Dynamic pricing and surge pricing are two common strategies that businesses use to adjust their prices according to any changes in demand and supply. While both methods have the same goals (to maximize profits, optimize revenue, and attract customers), they are not the same thing; we will explain the difference between dynamic pricing and surge pricing and provide some examples of how each is applied in various industries.

Dynamic Pricing

Dynamic pricing is a strategy that involves changing the prices of products or services based on various factors such as customer behavior, market conditions, seasonality, inventory levels, competitor actions, and time of day. Dynamic pricing allows businesses to promptly respond to fluctuations in demand and supply, and to offer different prices to different segments of customers. For example, airlines use dynamic pricing to adjust their fares based on number of seats available, destination, date of travel, and customer loyalty status. Hotels use dynamic pricing to change their room rates based on occupancy, location, season, and events happening in the area. E-commerce platforms use dynamic pricing to offer discounts, coupons, and deals based on the customer's browsing history, purchase history, and preferences.

As you may have seen in the news, Wendy’s was mired in a controversy earlier this year when they announced they would be implementing dynamic pricing by early 2025. Many people misunderstood this as Wendy’s saying they would just “jack up” their prices during peak times, but that is not Wendy’s intent or strategy.? Their approach is actually rather unique in that they want to implement the reverse of dynamic pricing. For example, most restaurants and fast-food places are busy during breakfast, lunch, and dinner times; conversely, there are pockets of times throughout the day where customer traffic is low. Wendy’s plans to deploy Artificial Intelligence (AI) to gain better insights of traffic patterns in their locations throughout the day, and based on real-time or near real-time data, they will lower their menu pricing dynamically through their digital menu boards. As one hypothetical scenario, let’s say Wendy’s is charging $8.99 for a burger during lunch hour or during times when they are busy, but when they detect traffic is lower than usual during other times, they could reduce the price of the same burger to $5.99 to attract more customers. By lowering pricing during low traffic periods, they are hoping to attract more customers who otherwise might not consider going to Wendy’s.

Surge Pricing

Surge pricing is a type of dynamic pricing that involves increasing the prices of products or services when the demand is higher than the supply. Surge pricing is usually triggered by a sudden spike in demand caused by factors such as weather, traffic, emergencies, or special occasions. Surge pricing helps businesses to balance supply and demand, and to incentivize customers to use the product or service at a different time or location. For example, rideshare services use surge pricing to increase their fares when the demand for rides is higher than the number of drivers available, such as during rush hours, bad weather, special events, or holidays. Event organizers use surge pricing to raise the ticket prices when the demand for the event is higher than the capacity, such as for concerts, sports, or festivals.

While airlines, sports and entertainment events have used surge pricing for many decades, most of us became aware of surge pricing when we used rideshare services such as Uber and Lyft. When there is a high demand for the rideshare, prices surge; when demand normalizes, prices return to their usual levels for the same trips.

Conclusion

Dynamic pricing and surge pricing are both effective ways to optimize pricing and revenue management, but they are not the same thing. Dynamic pricing is a broader concept that involves changing the prices of products or services based on various factors, while surge pricing is a specific and more immediate type of dynamic pricing that involves increasing the prices of products or services when the demand is higher than the supply. Both methods have their advantages and disadvantages, and businesses need to consider their goals, customers, competitors, and market conditions before implementing them.

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This is a joint article by Hemang Davé and René J. Aerdts, Ph.D. Please note that the views expressed here are ours only, and do not represent Kyndryl’s official positions. We would love to hear on the topic of dynamic pricing vs. surge pricing. Please feel free to share this article with others in your network.

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